Recently I wrote an article called Hewlett Packard: An Introduction to Statistical Indicator Analysis (SIA), presenting my own unique form of technical analysis, which takes a long term view on how a company, fund, index or commodity is performing relative to its price action. In this article I will concentrate on gold vs. the gold miners and give my opinion on how an investor should act based purely on the technical analysis results.
Let us first begin with analyzing gold (GLD) from 1983 to today.
Obviously gold, as shown in the chart above, has had a hell of a great run, and since 1999 has dramatically outperformed the world’s stock markets by a wide margin. In 1999 an investor would have had the opportunity to buy gold at a 34% discount to its SIA or growth level and actually below its low growth level. When such circumstances occur, the probability of success in an investment is greatly increased, as long as the slide does not continue further to the negative growth level.
Since gold is a commodity and not a company, it will not go out of business and liquidate, so our chances of success are even more improved. Companies on the other hand, can continue to go down to zero and liquidate. As an investor, it is always better to let the price of the instrument you want to invest in, break above its growth level before taking the risk, otherwise you could find yourself in a situation similar to what BlackBerry investors are currently experiencing. SIA analysis of BlackBerry is shown here.
In the end it all depends on the level of risk one is willing to take on. SIA is long term technical analysis, and is only one tool in an investor’s toolkit, but is a very powerful tool indeed, as it gives one a clear historical view of investor sentiment.
In getting back to gold, its current growth level or SIA is $770.42. However I doubt whether we will ever see gold hit that price. That said, you can never tell how many investors have love/hate relationships with their investment in gold and may decide to sell if gold goes much lower.